Third-Country Effects of Chinese Export VAT Rebates

Abstract

The system of VAT export rebates represents a principal instrument of Chinese trade policy. Though there are well-established studies showing that the rebates positively affect Chinese export, their potentially negative effects for global trade, being extensively discussed in the media, remain a blind spot in trade literature. This paper estimates trade diversion effects of China`s VAT rebates within a gravity framework with four-way fixed effects for bilateral trade between 75 countries in the period of 2004-2018. The findings suggest that, on average, increase in rebate by 1% causes 2.62% decrease in third-country export. The effects are heterogenous at country level. Richer countries with higher level of trade liberalization and higher export diversification at intensive margin are more immune to Chinese export rebate policy. There is also evidence that countries, which export higher quality goods are hurt more. Finally, negative effects are driven by machinery and equipment sector and intensive margin.